November 29, 2012

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Target Corp. easily beat first-quarter profit expectations, but slowing sales at the Minneapolis retailer and across much of the retail sector is creating a lot of unease.

Target's weak store sales and its expectations for this quarter, released Wednesday, pushed shares down more than 9 percent, the biggest decliner on the Standard & Poor's index. It was the worst intraday decline for Target's stock since December 2008.

Shares of almost every retailer followed suit in what is shaping up to be a miserable year for the sector.

Target operates about 30 stores in Indiana, including a dozen in the Indianapolis area.

Shares of Wal-Mart Stores Inc., which reports earnings Thursday, fell more 3 percent as investors got out of the way.

Target CEO Brian Cornell blamed the cold and wet spring for weakening sales. Shoppers also remained cautious about spending money, he said. They still came to Target to stock up on goods, but made fewer quick trips.

Still, Americans are spending. The problem for traditional retailers is that they're spending it elsewhere. Economists have seen a shift in habits, with more disposable income going toward vacations and dining out, rather than toward clothing or accessories.

And not all retailers are suffering. Lowe's and Home Depot put up huge numbers this week thanks to a hot housing market. Shares of both home improvement retailers have recently hit all-time highs.

Target earned $632 million, or $1.05 per share, for the three months ended April 30. That compares with $635 million, or 98 cents per share, a year ago.

Stripping out one-time items, earnings were $1.29 per share, which was much better than the $1.19 per share projected on Wall Street, according to a FactSet survey.

But revenue fell 5.4 percent, to $16.2 billion from $17.1 billion, which was shy of expectations.

Sales at stores opened at least a year rose 1.2 percent, which was off the 1.6 percent increase that was expected. Industry analysts watch this figure closely when determining a retailer's health because the volatility associated with stores recently opened or closed is removed.

Target has been working on reinvigorating its business under Cornell, who took over in August 2014. He wants to regain the retailer's cheap chic status and make Target more nimble after a series of headline-grabbing setbacks, including a major debit and credit card breach that hurt sales and profits for months.

During the recession, the company lost its mojo as a trendsetter when it expanded aggressively with grocery aisles.

Cornell has recast the executive ranks at Target this week named Mark Tritton, an executive at Nordstrom, to be its chief merchandising officer. That fills a role that had been vacant for almost a year when long-time executive Kathryn Tesija stepped aside.

Target is focusing on key merchandise categories like fashion, home furnishings and wellness products. The company has spruced up its presentation and created vignettes to feature its home products. At the same time, it's shifting more of its spending from stores to online investments and its supply network.

Its grocery aisles were overhauled during the quarter, which may have confused shoppers looking for their favorite brands, the company said. But it said food sales have rebounded since. About 1,000 new grocery items were added, which were mostly organic, natural or gluten-free, Cornell said.

Target said Wednesday that it still expects its full-year adjusted profit to be within its previous guidance range of $5.20 to $5.40 per share. Analysts surveyed by FactSet are looking for $5.27 per share.

For the second quarter, however, Target is projecting an adjusted profit of $1 to $1.20 per share, with same-store sales flat to down 2 percent. Wall Street had anticipated a profit of $1.36 per share, with same-store sales up 1.8 percent.

A backlash from Target's decision to allow transgender customers and employees use the bathroom of their choice had no impact on sales, according to Cornell. Only a handful of stores around the country were targeted by protesters or boycotts, he said. More than 1 million people have signed an online petition not to shop at the retailer over the decision.

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